The loss of 75,000 jobs on Monday was a stark reminder of why the country is in desperate need of a federal stimulus package. But the $825 billion plans under consideration this week in Congress should be the starting point for a more refined approach. As the House prepares to take up its plan as early as today, lawmakers need to remain focused on two goals. The proposals should create jobs, and they should have a positive impact on the economy in a reasonable time.
Most concerning about the evolving plans are their basic structure. To attract Republican support, President Obama and congressional Democrats have set aside one-third of the plans' value for tax relief.
The biggest tax break in both the House and Senate plans is economically suspect. The House plan would provide a $500 tax cut for each working individual earning up to $100,000 or couples earning up to $200,000. As last year's tax rebate illustrated, tax cuts cannot be counted on to stimulate the economy. What's more, the proposed tax cut would come in dribs and drabs by reducing the amount of withholding for Social Security and Medicare from paychecks. It's hard to believe the equivalent of $10 more each week in a worker's pocket would make a significant contribution to righting this economy. Yet the broad tax cut accounts for half of the tax relief.
Other tax cut proposals appear to be more appropriately targeted to stimulating the economy, such as: expanding a $7,500 tax credit for new home buyers; suspending taxes up to $2,400 on unemployment benefits; giving capital gains tax breaks to those who invest in small businesses in the next two years and hold the investment for five years; and providing businesses with bigger tax deductions for any capital spending this year and next.
Congress needs to apply the same conditions to spending up to $550 billion. Investments should create jobs or stimulate the economy in a reasonable time. The Congressional Budget Office has warned that some spending tagged for infrastructure may take years to spend. It's not enough to say a project will help the country's future economy — such as the $20 billion proposed to modernize the nation's health information technology systems, $10 billion for science facilities or $32 billion for transportation projects. If projects don't have near-term potential — no matter how worthy — they don't belong in this stimulus plan.
Some spending decisions are common sense. Spending $63 billion to increase unemployment and food-stamp benefits will sustain families but also help the economy. State and local governments, too, will benefit from the infusion in cash for everything from schools to Medicaid programs. But discipline is required at all levels of government to assure that public money flowing from this spending plan puts people to work or stimulates the economy.
That discipline must start at the top. The plans being approved this week in Congress should be the start of a conversation that will require discipline and bipartisan compromise. An effective stimulus package has to offer more than long-range construction projects and politically popular tax breaks.